Accounting: Financial Statements: An Introduction, Objectives, Capital and Revenue Expenditure (For CBSE, ICSE, IAS, NET, NRA 2022)

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Everyday business transactions of a firm are recorded in a systematic manner. This process is called as accounting system. The main purpose of accounting is to ascertain financial results of a business enterprise. These financial results include profit and loss of the business operations and the financial position of the business enterprise on a particular date. The above-mentioned financial results can be obtained by preparing two important financial statements. Those are Trading and Profit and Loss statement, Balance Sheet.

Financial Statements – an Introduction

Financial Statements

  • Financial statements are the statements that are prepared at the end of the accounting period. These include income statement i.e.. Trading and Profit and Loss Statement and position statement i.e.. Balance Sheet.
  • Accounting period is generally one year. In India, accounting period starts from April 1st and end on March 31st.

Objectives of Financial Statements

  • To ascertain the results of business operations by preparing income statement which describes the profit earned or loss incurred by the business enterprise for a particular period of time.
  • To know the financial position of the business concern by preparing Balance Sheet.
  • To provide information, about the business operations and business position, to the investors, banks, government, employees and public at large.
  • To help management in decision making regarding its business operations, by comparing its current financial statements with previous year financial statements.
  • To prove solvency of the concern. This helps in getting more funds from the banks.

Before knowing how to prepare Financial Statements we have to following things –

Difference between Capital Expenditure and Revenue Expenditure

Table Supporting: Difference_between_Capital_Expenditure_and_Revenue_Expenditure
Basic of DifferenceCapital ExpenditureRevenue Expenditure
  1. Purpose
Incurred for acquiring of fixed assets such as building, plant and machinery etc.Incurred during the course of normal business transactions i.e.. Salaries, Carriage etc.
  1. Earning Capacity
It increases the earning capacity of the business. (wealth maximization)It helps in maintaining the earning capacity of the business intact.
  1. Periodicity of benefit
Benefits spread over number of years. (long term benefits)Benefits in the current accounting year.
  1. Occurrence of expenditure
Non-recurring in nature.Recurring in nature.

Difference between Capital Receipts and Revenue Receipts

Table Supporting: Difference_between_Capital_Expenditure_and_Revenue_Expenditure
Basic of DifferenceCapital ReceiptsRevenue Receipts
  1. Source
Do not arise during the normal course of business. Ex: Sale of fixed assets, raising of long term loans etc.Receipts arise during the course of business. Ex: Sale of goods, Rent received, dividend received etc.
  1. Nature
These are not treated as items of the income of the business.These are treated as items of the income of the business.
  1. Occurrence
Non-recurring in nature.Recurring in nature.

Financial Statements

Income Statement

  • Income statement consists of Trading and Profit and Loss Statement.
  • Trading Account: It is statement prepared to know all trading activities (buying and selling of merchandise goods) of the business enterprise. It shows whether the selling of goods purchased or manufactured resulted profit or loss to the business.

Format of the Trading Account:

Trading Account for the year ending …

Dr. Cr.

Table Supporting: Income_Statement
ParticularsAmount (₹)ParticularsAmount (₹)
Opening Stock

Add Purchases

Less Purchase Returns

Add Direct Expenses:

Gross profit transferred to P&L A/c

× × × × × × ×

× × × × × × ×

× × × × × × ×

× × × × × × ×

× × × × × × ×

Add Sales

Less Sales Returns

Closing Stock

Gross loss transferred to P&L A/c

× × × × ×

× × × × ×

× × × × ×

× × × × ×

× × × × × × ×× × × ×

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